Back to the Future

I’ve been a tech investor since 2011. I started by foregoing cash fees in return for equity to work with Uber on their regulatory issues, then CLEAR, then FanDuel, Lemonade, Ro, Ripple, CloudKitchens and a bunch of others. My partner Jordan Nof and I started our traditional venture fund, Tusk Venture Partners (TVP), in 2016 and then launched our second and third funds (and a breakout fund) in 2019 and 2021 respectively. The thesis worked — our investors have done well (TVP’s Fund I – a 2016 vintage – has a DPI of almost 2 and a MOIC of 4x. Fund II – a 2019 vintage - has a MOIC of 3.1x. Fund III – a 2021 vintage – is now in the black and growing. Our SPVs have a MOIC of 6.4x). 

I am really proud of this performance and learned a tremendous amount over the past nine years. But given the ever increasing importance of how politics and regulation impacts startups and now having now fully experienced two different versions of tech investing, it’s become clear that the equity for services model is the better approach for me. Here’s why:

• It lets us focus on what we love and do best (legalizing disruptive technologies). As we enter a new era of AI where the regulations have yet to be written, the ability to determine what those rules are will have a massive impact on the success or failure of any AI startup in a regulated industry. 

• It fully aligns us with founders and their startups and makes us accountable for tangibly helping startups clear regulatory hurdles. 

• The investments that have been equity for services have generated the highest returns.  Those engagements have provided the funding for the high-impact initiatives we’ve launched out of my foundation that can bring massive societal change: mobile voting and hunger. Those engagements provided the funding to help pass 25 bills in 20 different states providing food on a regular basis to 13 million more people (campaigns currently underway in New York, Arkansas, Delaware, Oregon, Kansas and Ohio). Those engagements allowed us to pioneer mobile voting, build secure technology that we will make free and open source to any government that wants to use it, and begin running legislation in cities across the nation to permit mobile voting for all citizens, starting with municipal elections. 

Here’s the math. TVP is a traditional 2 and 20 fund. Under the current approach to venture, we raise a dollar. We invest it. At some point, hopefully, a liquidity event occurs. We make our investors whole. If there’s more than a dollar, investors get 80 cents of the next dollar. After accounting for fees, we get 20 cents thereafter, which we split amongst ourselves. We give our regulatory services to portfolio companies for free as part of winning an allocation. And we deal with all of the other work and headaches that come with running a venture fund. That’s how venture works. 

When I was taking equity for our regulatory work, we performed the same core function we do for our TVP portfolio companies now — building and running regulatory and comms campaigns, whether it was legalizing ridesharing for Uber, or fantasy sports betting for FanDuel, or prescription via text for Ro, or getting Lemonade insurance licenses, or any number of issues ranging from autonomous trucking to crypto to education. But in the equity for services model, when a liquidity event occurred, we got the whole dollar. And then the whole next dollar. 

As we were moving towards a first close on fund four, I couldn’t help thinking, what if we could partner with any startup and focus just on the regulatory work and not have to worry about other areas outside of our core expertise? What if I didn’t have to spend so much time constantly pitching LPs or sitting on boards? If great founders will trade us equity for our work without our then having to return most of the profits to investors, why would we choose the model that gives away our expertise for nothing? If you don’t have a skill set that enables you to earn equity and get on the cap table without having to raise outside money, then of course traditional venture is the right path. But we do. 

That’s why I decided not to raise a fourth fund and return to our original model. Through the life of our three existing funds, we’ll continue to work daily with our portfolio companies on all of their regulatory issues, sit on boards and work hand in hand with our founders, make decisions about pro rata and do everything else we do today. That will continue every single day until the investment periods for all three funds are fully completed (Funds I and II are fully invested and Fund III has room for around 3 new deals, outside of follow-ons). Our investment team, most notably my brilliant and dedicated partner Jordan Nof, are excellent career investors – it’s what they love, it’s what they do best, and what they’ll continue to do through our investment period and then in new ways beyond the life of our funds. I’m excited for them. 

On my end, it means creating a new entity that does the following: 

(1). We start with a handful of founders with really big ideas at early stages, especially in AI, with really big regulatory challenges ahead of them. This is similar to our work with Uber. 

(2). We work mainly with companies as they expand at their series A and B, solving regulatory problems like fighting off corrupt entrenched interests and building new regulatory frameworks for startups in white spaces ranging from AI to crypto to delivery drones to small scale nuclear reactors to autonomous vehicles to biotech. This work happens at every level of government – local, state and federal.  

(3). We work with other startups at their series C or D who are facing new and/or are mired in never-ending regulatory battles around their business model. 

(4). Sometimes, we write small balance sheet checks into those deals, especially in early stage companies, when it feels warranted. 

(5). For future rounds, we have super pro rata and can raise SPVs on a case by case basis. Existing LPs in TVP will be welcome to participate. 

(6). And if deals come our way outside of startups – say private equity or infrastructure – that have a meaningful regulatory or political challenge that we want to solve, we can do those too. 

All this happens in lieu of raising a fourth traditional venture fund. Under this model, there is no blank-check fundraising with its high fees and misalignment (just showing our partners individual deals that they can say yes or no to). No portfolio construction limitations. Much more limited reporting (just on the SPVs). We focus fully on our core expertise. And because we’re no longer competing with other venture funds, we believe there are now opportunities to partner across the spectrum. 

In some ways, it’s like a family office bringing everything in house. In some ways, it’s a consulting firm focused on taking mainly equity and writing small checks. In some ways, it’s a deal syndicator. In some ways, it’s a think tank that runs experiments and makes bets. 

Whether it’s creating the right regulatory frameworks in new industries like AI, crypto, drones or autonomous vehicles or fighting off the corruption of entrenched interests in existing industries like hospitality, gaming, transportation, energy, banking, education and health care, the only way for a startup in a regulated industry to succeed is by taking politics seriously from day one. That’s what we help them do, day in, day out. 

I love new ideas. I love innovation. I love working with founders and funds that see the world the way I do. And, warts and all, I still love politics. I want to use our skills to combine those worlds in a way that lets us do the work we do best, maximize our expertise and maximize the money we can earn so we can invest even more into the things we truly care about like mobile voting and universal school meals. That’s what this new approach does. I can’t wait to get started. 

www.tuskventures.com